Time for GPs to get on our wavelength

If you ’ve been in the market raising a fund in Europe, chances are you’ve come across Niels Konstantin Jensen, Robbert Coomans and Michael Barben. The trio head up private infrastructure investments at Danish pension
manager ATP, Dutch pension manager APG Asset Management and Swiss asset manager Partners Group respectively.

As the trio gather for a discussion at the Radisson Blu Hotel on the sidelines of Infrastructure Investor’s Europe forum in Berlin, the thought occurs that the men gathered in the room represent serious amounts of capital.

Together, their firms manage around $520 billion in assets under management.

But if this is a serious consideration, the conversation starts off in a light-hearted manner as one of the hot topics on the minds of limited partners (LPs) everywhere is broached: the management fees that infrastructure managers propose to charge their fund investors.

“I haven’t come across anything that I thought was reasonable,” Jensen says with a smile. “Now, as a starting point, 1.25 [percent], something like that, is something they can start with. And then we think it’s still unreasonable,” Coomans adds, eliciting laughter from around the table.

It’s not that Coomans is looking to select managers based strictly on fees. But it’s certainly one of several areas where these LPs don’t necessarily see eye-to-eye with the managers who come to them seeking commitments. Over a frank, 45-minute discussion, Coomans, Jensen and Barben explain what they look for in potential partners – and what they see lacking from current fund offerings in the market.

Currency matters

One issue for which views do not need to be prompted is currency risk. As pension managers who need to pay their pensioners in euros, Coomans’ APG and Jensen’s ATP need assurance that their investment gains won’t be wiped out by wild swings in the value of that currency.

“I think the currency issue is very, very relevant because we need to have that hedged. And if the local bank market isn’t as available as it is, say, in Europe, it gets very expensive to have the currency hedge.
Even if you go to Eastern Europe, it also has a price,” Jensen says.

He offers Brazil as an example. “A lot of funds are going into Brazil,” he says, but to date he has yet to back a Brazil-focused infrastructure manager in part because of the currency risk. The euro has been on a veritable see-saw against the Brazilian real over the last year, seeing big peaks and troughs over the period. That translates to hedging costs ATP would have to take on regardless of whether it buys Brazilian government bonds or an infrastructure manager offering a similar return in exchange for exposure to a relatively higher-risk asset class.

“This is, for some of the managers, certainly not something that they have thought about,” chimes in Coomans, who has stayed out of Latin America in part because hedging currency risk for a ten-year period covering a fund’s life is “very difficult”.

Managers pitching Latin America haven’t necessarily appreciated this, he says: “They come to you and say, ‘oh, we have a very good opportunity and this is what we want to do, returns are 15 percent’. And we then show them that they could have 14 percent on government bonds, so why should you do 15 percent? It makes no sense. Then they say, ‘oh, yeah, but it’s 15 against 11 in Europe [which] is interesting’. Yeah – but don’t risk that currency.”

Emerging concerns

Currency risk, admits Coomans, is one reason why APG Asset Management – which has a global investment mandate and a two-person team sourcing infrastructure deals in Hong Kong – hasn’t done more in emerging markets. Another reason is that, frankly, he questions the wisdom of mixing emerging market exposure into an infrastructure portfolio, which, after all, is supposed to de-risk an overall portfolio by providing stable, uncorrelated returns.

“If you start talking about infrastructure as an asset class that will provide long-term cash flows with an inflation component in it, the question really is: do you add a lot of value or do you diversify a lot if you are doing that in projects in India or in China, where you have a completely different inflation component there?” Coomans asks. A satisfactory answer, for now at least, is not forthcoming: “I don’t think that we will do a lot more [in emerging markets] than we are doing at the moment.”

Not so for Barben, who recently put in an indicative bid for a renewable power investment in Mexico and is looking to build an overall 20 to 25 percent emerging market exposure for his €500 million infrastructure fund.

“Diversification,” he says, “is key for infrastructure investments because infrastructure assets are much more driven by their unique local circumstances”.

“The assets are immobile. You can’t leave, so you have to be comfortable about the regulatory regime, the legal regime in that country and its ability to fund infrastructure investments and then place your investments across different countries that you feel comfortable about,” he adds.

Barben has already invested in a fund in Brazil, the P2 Brasil Private Infrastructure Fund, and has gained exposure to India, China and Malaysia via other fund investments and secondaries. He says he’s looking to back more emerging market-focused managers and is particularly interested in markets like Chile, Mexico, India and Indonesia, among others.

“From our part, we currently only invest in OECD countries,” Jensen says, referring to the Organisation for Economic Cooperation and Development, a club of developed countries that includes Canada, the US, the UK and Australia, among others. “We have looked into emerging markets but we have not done anything actively in that space,” he adds.

It’s not because the desire isn’t there, however. ATP will invest in emerging markets “if we can find the right manager”, he says.

Selective criteria

This brings us to another topic of great importance during a difficult fundraising environment: manager selection. What does it take to successfully extract a fund commitment from a prominent LP such as Partners Group, APG or ATP?

“I think that it’s about chemistry and investment beliefs, basically,” Jensen says. “We’re looking for the funds that have a similar view of the world, of infrastructure, as we have.”

That view, he says, is very much focused around inflation protection. An infrastructure asset should, above all else, provide its investor with a hedge against inflation. And that is what a fund manager should seek to deliver to LPs.

“In an ideal world, the managers we invested in, they would only invest in inflation-protected assets. But the ideal world doesn’t exist – yet,” he says. “This is partly because we don’t have those kind of managers but also because investors not are a homogenous class with the same investments beliefs.” Which is why Jensen co-invests in infrastructure assets whenever he feels his managers have found assets that afford appropriate inflation protection – and therefore merit greater exposure.

Co-investment fits with another key element of Jensen’s world view: “We consider ourselves as owners, as long-term owners [of infrastructure assets],” he says. “It’s not just investments.”

Like Jensen, Partners Group’s Barben is also looking for more than investment opportunity. As an infrastructure investment manager who has alternatively made fund commitments (seven), direct investments (four) and secondary stake purchases (six), he’s looking for someone he can partner with on investment opportunities over the long term. So it’s really important to him that managers have “a longterm vision of their business, not just a long-term vision of the assets and the investments they make”.

Equally importantly, since Partners Group manages €20 billion of investment programmes across private equity, real estate, infrastructure and debt, infrastructure should not just be “a semantic thing” to prospective managers.
“If it’s infrastructure, it needs to be clearly distinct from those other asset classes. Otherwise, we don’t see a value in it,” he says. “A clear focus on stability and longterm visibility of cash flows generated by the asset, inflation protection and long-term contracts can help managers achieve that distinction,” he says.

Barben also expresses a preference for independent fund managers and for closed-ended funds, both points that fall under the umbrella of alignment of interest. “I firmly believe that the closed-ended fund at least instills a certain discipline,” he says. “This implies less points of conflict with the manager.”

Coomans agrees: “You cannot expect a manager to wait until he’s 80 before he gets any money back. That’s just the reality.” For open-ended funds without a defined investment and performance payment period, that becomes a problem.

But it’s not a make-or-break for Coomans, for whom manager selection always begins with a look at his portfolio. “What we do, is first of all, we determine, on our overall portfolio, what are the assets that we are looking for now?” he says. “After we have selected what we are really looking for, then we select the managers who, in our opinion, are qualified in that particular part. And then after that, after we’ve done that and have been through it and talked to them, then, of course, fees is one of the discussion points.”

Firm on fees

And that brings the panel to what is, perhaps, the most controversial topic in the asset class today. In the ‘ancient’ days of infrastructure – say, 2005 and 2006 – it was not uncommon to see fee structures for infrastructure funds that closely mirrored the 2 percent management and 20 percent performance fees of private equity funds. These days, the so-called 2-and-20 model is just plain wishful thinking.

“We never have paid it,” says Coomans. “That’s certainly, in our opinion, out of line.”

“Yeah, I would say so,” says Barben.

“Agreed,” says Jensen. “And we’re not, I don’t think, being approached with that anymore.”

But managers shouldn’t assume that going 25 or 50 basis points below the 2 percent management fee will do the trick. “We have never paid the fees they asked for,” says Coomans, because infrastructure is a lower-return asset class. “And if they still think that they can make a hell of a lot of money out of it, then, well, we don’t want to invest in them,” he adds.

There is perhaps, another reason for Coomans’ reluctance to pay high fees. At €277 billion in assets under management, APG is capable of writing large cheques that can really move the needle on a manager’s fundraise. To win such “anchor” commitments, volume discounts are quickly becoming the norm in the industry. The latest such anchor for Coomans’ APG is said to be a commitment to CVC’s debut infrastructure fund. Coomans declined to comment on the investment.

Barben points out that, because infrastructure is a lower-return asset class than private equity, “you can’t just select on cheapness. Someone who develops a project, builds it, creates an asset, that’s a different story and may be worth a lot more”. One value-add manager Barben recently backed is New York-based fund manager Highstar Capital, whose fee structure he believes is appropriate to the return profile of its strategy.

For now, though, risk-return expectations are anyone’s guess. Coomans likens the situation to the private equity industry in the early 90s, when managers were seeking ever-larger amounts of capital for the asset class but potential LPs didn’t have any historical return data on which to base their performance expectations.

“I think the same thing is happening with infrastructure funds,” he says. “The first ones will now start to deliver their real figures and you can bet on it that things will develop over time.”